So what is the best way to meet in the middle when taking a trade?  I have found that asking one simple question helps me a lot.  Nothing is foolproof of course, but it does cut through a lot of the emotion and anxiety.

The question is…

“Do I have an advantage? “

Duh.

Yes, it may seem idiotically simple now, but how many times have you been caught up in the moment and taken an impulsive trade?  Don’t worry, I’m not judging…I’ll bet that I have done that twice as many times as you have.

This question reminds me to do a quick logic check and see if this current setup will give me an edge.  Doing this not only keeps me out of stupid, impulsive trades, but it will also force me to take trades that I may be apprehensive to take (for whatever reason).

Missing out on profit can be just as bad as getting into a crap trade.

An Example

Here is a chart from a couple of days ago where I kept myself from taking a bad trade by asking this simple question.  This is the exact point in time where I had to make the decision of “go” or “no go.”

"...but I can still get in..."

This is a 1 hour EURUSD chart, trading the Wallaby method.  I identify an advantage in this trade when price and the Wallaby indicator (red) become divergent and Stochastics (blue and yellow) are at an extreme.

In this case, my maximum advantage would be when the Stochastics are as close to the top of the range as possible and the yellow line has crossed over the blue line, with good separation between the two.  As you can see, it has already moved down through most of the range and is actually starting to turn back up again.

Price has also almost hit the first profit target of support, which means that it will be harder to make any profit from there.

It would have been easy to justify taking this trade and if I’m honest, I did hover over the Sell button for about half a second.  But then I asked myself the question and the answer was “NO.”  My advantage was gone and there was no reason to take the trade.

Even at optimal entry, shown in the chart below, price was too far gone and the easy (er) money was already off the table.

The first profit target is almost hit.

After 1,000+ backtesting trades in this pair, I understand what to look for and I know when I have an edge.  That doesn’t mean that I am immune from taking a bad trade or taking a loss, it simply means that I understand the trade and am less likely to do so.

How did this trade turn out?  It would have been profitable.    But I’ll take the odds over 20/20 hindsight any day of the week.

If you don’t know how to identify an edge in the market, then you have bigger problems.  Get to work stress testing your method and learn to spot a good opportunity.  It is hard work, but it is worth it.

What do you do to keep yourself out of bad trades? Leave a comment below, I would love to hear about it.

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Today, I found a great video that I thought I would share with you.  Big shout out to John for finding the video and sharing it on Google+.  It is an interview with Trader and Trading Coach Denise Shull.  She focuses on the psychological aspects of becoming a professional trader and shares her experiences.  Although she talks about markets other than Forex, the concepts that she discusses apply to any market.

There are a lot of different topics that are covered in this video.  The ones that I found most interesting were:

• How to create an effective trading journal
• Why most of the trading advice out there is rubbish
• How long it will take the average person to become a professional trader
• The Perfect Indicator
• Why you should never try to control your emotions
• The one biggest piece of advice that Denise gives to beginning traders
• Why traditional trading psychology is broken
• And much more!

I found this video insightful and I hope it helps you gain a better understanding of the psychology of successful trading.  The most interesting thing that I learned from this video is that there is a lot of conventional wisdom that we learn from trading books and we readily accept that information as gospel.  However, sometimes when we stop to think about what we are actually doing when we are trading well, we are really doing something entirely different.

What did you learn from this video?  Did you agree with what she said?

Don’t get me wrong, I’m not talking about a 50% loss or anything crazy like that.  I (almost) always set my stop loss at 1-2%, I set an approximate profit target and let price action tell me when to get out.  But the losses were still getting me down.  It got to a point to where if I lost two trades in a row, I would stop trading for a week because I thought I was trading poorly.

But as everyone knows, two losses in a row is not necessarily poor trading.  That is just how trading works.

So what is the solution to the “losing trade” blues?

I have found that asking these 5 questions after a loss have helped me keep things in perspective and take the next trade setup without lamenting over the last loss.  You may not have to use these review techniques all the time, but I have found it helpful to be able to come back to this list whenever I feel that my losing trades are affecting my psychology.

1. Do I know my trade?

Before trading any setup, you should backtest it on the currency pair (or market) that you will be trading, for as long a historical time period as possible.  I have found that Forex Tester is the best way for me to do testing in Forex, but there are other solutions out there for Forex and other markets.

Knowing the maximum number of losses in a row, biggest drawdown and other related statistics can prepare you for a few losing trades.  Every system will have a losing streak, but keeping your head clear during the streak is more important than the money.

So if you are in a losing streak or even if it was just one loss that is bothering you, go back to your backtesting results and remind yourself that it is all a part of how the system trades. Being able to answer “YES” to this question will give you the conviction to move forward.

2. Can I reverse what happened?

Regardless of how much money you lost, there is no way to reverse what happened.  What is done is done and you need to move on.  If you traded poorly then rejoice in the fact that NOW is the absolute best time to figure out what went wrong and try to correct it so it doesn’t happen again.

If you traded well and still lost money, then don’t beat yourself up over the 10,000 things that you could have done. That doesn’t do you any good.

Take the loss and move on.

3.  Am I revenge trading?

Everyone does a revenge trade from time to time, it is human nature.  But putting too many revenge trades together in a row can blow out your account pretty quickly.

Revenge trading is double trouble.  Once you get into revenge mode, you start throwing rules out the window.  Those rules are there for a reason…to make you money!

Then after the revenge trade, you beat yourself up for trading poorly and that can make you think that you are a bad trader. This leads to second guessing yourself and your systems.

If you lost your last trade, asking if the next trade is going to be a revenge trade can keep you out of trouble and psychological torment.

4.  Am I risking too much per trade?

You could be trading well, but just taking a little more risk per trade than you are comfortable with.  For example, you could see a setup that you know by heart and risk 3% of your total account on that trade.  In your testing, you know that the setup has a 65% win rate and will usually yield a 2:1 reward to risk ratio.

Over time, the trade will make money…according to your backtesting.

But is that 3% a little too much risk for you?  It may be OK for some people, but you have to protect your positive psychology and do what is right for you.  If you scale back to risking 1% on the trade, that may help you to see things more objectively and make winning and losing less of an emotional roller coaster.

5. Am I attaching too much of my self worth to this losing trade?

This was a big one for me.  I have this blog…I’m trying to make it as a professional trader…I have to win.  Anything less will be a public humiliation.

The situation will probably be different for you, but you get the idea.  If you really want to trade for a living, then you will make thousands of trades over your career.  However these trades do not define you.

Trading is one of the things that you do, but you are also a husband/wife, father/mother, friend, runner, volunteer, teacher, mentor, etc. Don’t define yourself by your trading, remember that you also fill other important roles in life.

If you keep your trading in perspective, you will feel less of a need to be right all the time and allow yourself to trade well.

How do you deal with losses?

That is just what I think, but I am interested in finding out how you deal with losses.  Feel free to leave your favorite tips below.

Photo: © Leloft1911 | Dreamstime.com

I have been trying to recreate actual trading conditions as much as possible.  That is actually pretty difficult during backtesting because there is no waiting (or you can pause the market indefinitely) and there is no real money on the line.

In order to recreate live conditions as much as possible, after I close and log a trade and imagine how I would have felt if that was done in my live account.  For me, this has been surprisingly effective and that is what brought me to that conclusion.

Why?

So the question naturally arises.

Maybe I am being too hard on myself?  Maybe I’m relying too much on the winnings?  Maybe I don’t have enough confidence in the system?

The answer was all of the above.

With this knowledge, I have been working towards evening out my perception towards winning and losing trades.

How?

I think I have to become comfortable enough with a setup to truly know what to expect in the long run.  In addition, I need to get away from the feeling that I HAVE to make money right away.  Just like in any other performance activity, the best things happen when you let them come to you.

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However, my ability to stay in a trade and see it to fruition is not as nearly as reliable as I would like it to be.   As I continue to work on this, I thought that I would at least jot down my thoughts that came about as a result of this trade.

Based on some of the comments and emails that I have received, this seems to be a common issue with other traders too and I hope these thoughts will help you too.

I dont’ know about you, but usually when I bail out of a trade early, it is for the following reasons:

• I didn’t have an exit plan going in
• I got nervous because because price became volatile
• I didn’t backtest the strategy I am trading

Volatility is OK, IF…

When things get really volatile, sometimes it is best to bail out, especially if you have a profit on the table.  This is a judgment call and should be exiting the trade because the volatility is happening on the time frame you are trading on and not because you get scared out on a significantly smaller time frame.

For example, if you are trading on the 1 hour chart, it probably isn’t a good idea to base your exit on the 1 minute chart.  The 1 minute chart will give you a heart attack if you are really trading based on signals on the 1 hour chart.  If you don’t believe me, try it.

Yes, I have been guilty of this many times too.

Not Excusable

The other two causes are just simply sloppy trading.  So what can I do to eliminate this from my trading?

• Backtest every trading system thoroughly and be comfortable with the risks
• Practice trading for at least an hour a day with Forex Tester 2
• Log my target price in my trading log
• Log the trading system that I am using on my trading log.  Hopefully, that will remind me to only trade “approved” systems.

What do You Do?

What do you think?  How to do you prevent yourself from bailing out early?  Feel free to leave a comment below.

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